What Come’s First? A Step-By-Step Guide to Financial Independence: Step 6–Pay Off Your Low-Interest Debt

Welcome to the fifth installment of Independent Beginning’s Step-By-Step Guide to Financial Independence inspired by Dave Ramsey’s “Baby Steps”. In the last installment, you learned about Step 5: Set Up College Funds. In this installment, you will learn about Step 6: Pay Off Your Low-Interest Debt

Step 6: Pay Off Your Low-Interest Debt

At this point on the road to financial independence, you have an emergency fund completed, all high-interest debt paid off, retirement funds set up, and college funds set up. Now, you are ready to pay off your low-interest debt. This means that all extra money you have each month that does not go to your retirement funds, college funds, and replenishing your emergency fund (should you need to use it) should be put towards this debt.

What is low-interest debt? Low-interest debt is just what the name suggests–debt with low-interest. However, “low” is just a relative term. In reality, low interest debt can cost you a fortune in interest. These debts include your mortgages, your student loans, and any low-interest business loans.

Why should you pay off your low-interest debt early? Paying off your low-interest debt early has a number of advantages. First of all, it will save you a huge amount of money in interest. In some cases, it can even save you hundreds of thousands of dollars in interest. Secondly, paying off these debts early will free you from the captivity of debt. You will no longer have to worry about missing a payment or not being able to afford a payment. Thirdly, you will feel a sense of ownership for the debt involving purchases, such as ownership of a home. Finally, you will free up future income to be used in whatever ways you choose instead of being forced to use it on the debt. In short, paying off these debts is essential to financial independence.

Why should you pay off your mortgage and lose the tax break? Many people are under the impression that they should not pay off their mortgage early because they will lose the tax break on the interest they will spend. While this is true, the argument is completely illogical. Why spend thousands of dollars in interest each year to get a $1000 discount? It doesn’t make since. You will be better off not having to pay the interest and not receiving the tax break.

With your low-interest debt paid off, you are now ready to move on to Step 7! Tune in tomorrow to see what it is!

Articles so far in the series:

1. Step 1: Set Up an Emergency Fund
2. Step 2: Pay Off Your High Interest Debts
3. Steps 3 & 4: Complete Your Emergency Fund & Set Up a Retirement Fund
4. Step 5: Set Up College Funds
5. Step 6: Pay Off Your Low-Interest Debt